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CEO annual letters | Gepha

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  1. During 2019, the Group maintained a clear focus on our key strategic objectives, and made good progress in each business segment to deliver earnings momentum, strong cash generation and an improved return on capital invested.
    The completion of our major three-year capital expenditure programme has led to significantly reduced investment requirements, and allowed us to start reducing debt levels. This has resulted in net profit and EPS growth, which significantly exceeded the 13% growth in Group revenue and 17% growth in EBITDA. Earnings per share increased by 33% to GEL 0.36, our return on capital invested (excluding newly launched facilities that are in roll-out phase) increased by a percentage point to 14.9%, and the Group’s EBITDA to cash conversion ratio reached 81% and resulted in operating cash flow of GEL 125 million.

    As we continue to make progress in delivering the strategy of each of our businesses and leveraging the strength of our franchise, we plan to continue to grow our revenue by double-digits while maintaining our high-quality asset base without significant further capital expenditure. In addition, the Group will continue to build out important, profitable new growth opportunities. These include developing medical tourism, creating new retail laboratory diagnostic services, expanding the outpatient clinics and adding new pharmacies and new products. Some of these business initiatives, such as medical tourism and pharmacies in Armenia, tap demand outside Georgia, with insignificant capital commitment, effectively enlarging our market. We will also continue to invest in our exciting IT and digital projects, which are significantly improving not only our efficiency but also our service quality and the customer experience. Together with the continued organic development we expect in our core operations, all this positions us well to grow the business over the medium-term at improved returns on capital, while also increasing operating cash flows.

    For comparison purposes, please note that my comments in this statement are based on the results excluding IFRS 16 impact.

    The Group. The Group’s 2019 results reflect delivery on a number of core initiatives in each business. Gross revenues totalled GEL 963 million, up 13% y-o-y. EBITDA of GEL 154 million represented a 17% increase year on year, and net profit increased by 30% over the same period, to GEL 69 million. The Group net profit, excluding foreign exchange loss and non-recurring expenses, was up 27% y-o-y, to GEL 74 million. Having completed the Group’s significant three-year investment programme, we are now seeing the benefits translated into even stronger net profit and earnings per share growth, as well as a solid 26% y-o-y increase in operating cash flow.

    Performance was good across all five of our business segments. Our Pharmacy and Distribution business performed particularly well, with 19% revenue growth (14% growth net of the newly added centralised procurement entity) and an EBITDA margin in excess of 10% for the year. Our Clinics business posted 50% EBITDA growth. Results in the Hospitals business are consistently improving as we focus on capacity utilisation, continue to roll-out our two new flagship hospitals and deliver recognised clinical quality. The Medical Insurance business delivered robust revenue growth and a healthy combined ratio of 94%, leading to a net profit increase in excess of 50% y-o-y to GEL 4.5 million.

    With inflation in Georgia above its target rate, the National Bank of Georgia (“NBG”) tightened the monetary policy and increased the refinancing rate by a total of 250 basis points (“bps”) in September-November 2019. This has affected the Group’s interest expense, as 75% of GHG borrowings carry a floating interest rate. Our lower borrowings balance (down 7% in 2019 y-o-y) and our Group-wide exercise to reduce borrowing costs will partly offset this. Most notably, in the third quarter, the hospitals segment reduced borrowing costs by refinancing higher cost debt with GEL 50 million in lower cost local currency denominated bonds. These bonds carried the lowest margin (310 bps above the base rate) ever achieved by a corporate borrower in Georgia.

    Hospitals business. During 2019, our Hospitals business revenues grew 9% to GEL 291 million. The revenue growth was supported by 58% growth in our two newly launched hospitals, especially at Caucasus Medical Centre where, according to a recently conducted Net Promoter Score (“NPS”) survey, the customers’ experience and satisfaction reached a score of 77% – a positive outcome for a newly launched facility. The business is also making progress on its medical tourism strategy. Active marketing campaigns and other development initiatives implemented in our five target country markets led to a 37% y-o-y increase in the number of international patients, which led to 2019 revenues of GEL 4.5 million (up 33% y-o-y) from medical tourism. As explained in detail later in this report, however, the 9% revenue growth represented a slowdown in growth momentum caused by Government changes made to the Universal Healthcare Programme (“UHC”) reimbursement programme in November 2019, and a temporary delay in issuance of guarantee letters under UHC in the final weeks of 2019 (since reversed) that affected planned treatments. EBITDA nonetheless increased 7% y-o-y to GEL 75 million, and the EBITDA margin was 25.6%. We achieved this result despite our two new flagship hospitals being in their roll-out phase, the impact of the Government measures referred to above, and the cost impact of the new Georgian pension system introduced in early 2019. Excluding the roll-out impact of our two new flagship hospitals, the EBITDA margin was 28.2%.

    Clinics business. Our polyclinic network continues to grow, and the EVEX polyclinics clearly stand out from the competition as
    new, modern facilities that provide a diverse range of high-quality services in a single location. The number of registered patients
    continues to grow quarter by quarter, and our polyclinics business became the market leader in Tbilisi by number of registered patients that reached c.193,000 in 2019 (up 47,000 y-o-y). During the year, revenues increased by 16%, with polyclinics growing at 23% and community clinics at 11%, the EBITDA grew by 50% and the EBITDA margin increased from 15.4% to 19.9% over the same period. We will continue to pursue our polyclinics strategy of increasing the client base, supported by the further roll-out of
    dental clinics and other services, which will allow us to consolidate our position as the largest, highest quality provider in this highly fragmented market.

    Pharmacy and Distribution business. Our pharmacy chain and distribution business has been a stand-out performer which
    delivered record revenues of GEL 615 million, up 19% y-o-y. The balance of the overall revenue growth was contributed by our centralised medicine procurement entity, which was transferred to the GHG Pharmacy and Distribution business in 2019. The business posted 14% organic revenue growth, supported by double-digit organic growth in both the retail and distribution businesses. Our gross profit margin is driven by the scale benefit and increased sales of personal care and beauty products. After introduction of private label para-pharmacy products (personal care, beauty, etc.) in May 2019, which posted c.GEL 1.0 million revenue during the year, we increased our commitment to the beauty retail market by signing a ten-year franchise agreement with The Body Shop, a leading British cosmetics, skin care and perfume company. In December 2019, we launched our first standalone, flagship The Body Shop store in Tbilisi, and started to operate our “shop-in-shop” model presenting The Body Shop stands in our high-end GPC pharmacies. Entering the beauty retail market is an important example of our strategy to develop new growth opportunities and shape new markets. Adding The Body Shop brand to the portfolio upgrades our range of personal care products, contributes to same-store growth and increases margins.

    The business continues to deliver positive operating leverage. This is supported by 25% growth in EBITDA and an EBITDA margin that continues to exceed our expectations, increasing by 50 bps y-o-y to 10.6%. This extremely strong performance is substantially above our targeted “more than 9%” margin.

    Medical Insurance business. Our Medical Insurance business has made substantial progress over the last 12 months and the business is now contributing meaningfully to the profitability of the Group. Net insurance premiums earned increased by 37% during the year, supported by the addition of a large state client in the first quarter. The combined ratio remained at a healthy 94%, translating into 29% EBITDA and more than 50% net profit growth of the business. More importantly, we continue to improve the proportion of medical insurance services delivered by GHG with 42.5% of medical expense claims retained within the Group, compared to 39.4% last year. We expect this ratio to continue to improve over the next few years.

    We did not win the tender in 2020 for the large state client, which will reduce y-o-y Medical Insurance business revenue in 2020 but have an immaterial impact on business’ earnings, as the loss ratio for the client was far above the average for the business.

    Diagnostics business. In December 2018, we completed the construction and opened Mega Lab, the largest diagnostics laboratory in Georgia and the Caucasus region. The diagnostics business is already delivering break-even EBITDA, with costs of our lab services to the Group’s healthcare facilities having been maintained at the same level. Over 670,000 tests were performed during 2019 for 277,000 patients – a significant achievement for a start-up facility.

    In line with our strategy as discussed at our June 2019 Investor Day, we have started to develop lab retail and have already opened ten blood collection points in our GPC pharmacies, serving c.1,800 customers and performing c.3,500 tests, with the plan to have c.50 blood collection points over the next few years. The business will also work on additional external contracts, serving healthcare facilities outside the Group.

    Clinical quality. Clinical quality in our hospitals, clinics and polyclinics continues as a major focus for the three businesses, as we continue our mission to lead a sea change in clinical quality in Georgia. Recently internally established clinical boards and clinical KPI monitoring are bringing quality standards in our healthcare facilities towards international benchmarks. Our Sepsis Recognition and Treatment Campaign, created and rolled out by our clinical team in 2019, is an example of an initiative targeting our most important quality opportunities. As a result of this campaign, which included staff training and implementation of new sepsis guidelines in our healthcare facilities, our diagnosis and treatment effectiveness improved significantly.

    First, in the sphere of electronic medical records (EMR), we launched a comprehensive EMR system in all of our polyclinics and community clinics, substituting 100% of the paperwork. We then successfully implemented an electronic medical ordering system in all our referral hospitals (representing c.60% of full EMR functionality). We will be continuing the roll-out of EMR in our hospitals in 2020.

    Second, at the end of 2019, we launched our innovative new digital consumer health platform “EKIMO”. Version 1.0 already
    consolidates the entire vertical spectrum of primary care in the country (primary care doctors and clinics, diagnostics, pharmacies, medical insurance and more), and is open to any local healthcare provider. With this initiative we are well on the way to achieving the Group’s mission of building and providing a consolidated, patient-centric customer journey for the country’s entire healthcare ecosystem, thereby improving the quality of healthcare and the value proposition for our patients and customers.

    Investing in people development. We continue various training and development programmes for our employees to help them
    contribute to better clinical quality and financial performance through personal and professional development. A key objective of the Group is to invest in the next generation of doctors, and position ourselves as the employer of choice. During the year, we spent a total of GEL 4 million on talent development. Our “GHG Leadership Programme” is one of the most popular leadership courses among our employees, and over 200 middle-level managers are engaged in the programme to improve their leadership and managerial skills.

    The year 2019 was outstanding for our GHG medical residency programme. The programme is post-graduate preparation for the
    next generation of doctors and facilitates an increase in the number of qualified physicians, and is now established as the most popular post-graduate medical study programme in the country. The GHG residency programme had its first graduates in 2019; of the 44 residents who completed the three-year programme, 30 of the most promising are now employed at GHG facilities. Currently, over 200 talented people remain involved in the programme in 29 different medical fields.

    Share exchange facility. In November 2019, Georgia Capital PLC – our majority shareholder which had owned 57% of the Group – announced an opportunity for shareholders of GHG to exchange their shares in the Group for shares in Georgia Capital PLC
    (“GCAP”). The Board of GHG believed it appropriate for the proposal to be shared with GHG shareholders, and welcomed GCAP’s continued confidence in GHG’s management and strategy and support for GHG as an independent, listed company and, in particular, GCAP’s recognition of the significant progress GHG has made over the last few years. Valid acceptances in respect of 40,894,166 GHG shares were received, which were scaled back by GCAP by 56.25%, in order to avoid an adverse impact on
    GHG’s public listing and index eligibility. On completion of the Exchange Facility, GCAP’s shareholding in GHG increased from
    57.0% to 70.6%.

    The Georgian macroeconomic environment. The Georgian economy continued to deliver robust real growth numbers, estimated at 5.1% for 2019, supported by strong double-digit growth of external demand. Overall tourist numbers continued to increase, despite a reduction in tourists from Russia following the direct flight ban introduced in July 2019. The current account deficit shrank significantly and hit an estimated historically low level of 4.4% in 2019, reflecting improvement in net exports and robust FX inflows. While the impact of the reduced number of Russian tourists on the economy has been small, the negative expectations created by the flight ban partly explain the 7.0% depreciation of the GEL vs US Dollar exchange rate since 20 June 2019, before strengthening in December and early 2020. The GEL depreciation in turn had an impact on headline inflation, which increased to 7.0% in December 2019. To curb this inflation, the National Bank of Georgia increased the monetary policy rate from 6.5% to 9.0% in the second half of 2019. Overall, we expect further macroeconomic growth over the next few years to support further growth in the Georgian healthcare services market.

    At the time of writing this report, the evolving issue of Coronavirus (COVID-19) is being considered by the management team and Board. There will almost certainly be a reduction in Georgian GDP growths expectations in 2020, but the country is well-positioned macroeconomically to absorb the potential impact.

    COVID-19 pandemic. As the largest healthcare provider in the country, we realise our responsibility within Georgia to combat the
    COVID-19 global pandemic, and have developed a significant Groupwide action plan. In the event of significant COVID-19 virus outbreak and in case of need, we have announced our readiness to isolate four hospitals across the country with appropriately trained staff, isolated wards and intensive and critical care units, thus avoiding the potential for the virus to spread to other hospitals. Employees of our hospitals and clinics have been given comprehensive training and general guidelines, including how to manage patient flow, based on the Georgian National Center for Disease Control and Public Health (“NCDC”) recommendations. We have put contingency plans in place for our business units, such as the Hospitals business, Pharmacy and Distribution business, and our central warehouse. We are also closely monitoring and managing our stock level, to ensure that we have enough medicines and major consumables in the country in the case of a significant virus outbreak. We are in constant contact with the Georgian NCDC and Ministry of Labour, Health and Social Affairs and are awaiting further instructions, should additional activities become necessary.

    Dividend distribution. Given the current level of uncertainty with regard to the global impact of COVID-19, the Board of Directors has decided not to recommend a dividend to shareholders at the 2020 Annual General Meeting at this stage, as announced in the 2019 preliminary results on 24 February 2020. When the full economic impact of the COVID-19 pandemic is better understood, the Board will consider the appropriate level. We will provide a further update with the announcement of the Group’s first quarter of 2020 results in May.

    During 2019, our businesses have continued to deliver on key clinical, quality and financial priorities. The significant investment
    programme of the last few years continues to be well-reflected in business performance. We have made good progress in our balance sheet management objectives to improve ROIC, cash flows, pay down debt to reduce interest costs, and therefore grow earnings more strongly than revenue and EBITDA. We expect these trends to continue, further focusing on our businesses’ operational performance, financial performance and capital allocation strategy, while business organic growth together with new projects, such as beauty, aesthetics and lab retail, will enable us to deliver significant growth momentum over the next few years.

    Nikoloz Gamkrelidze

    CEO of Georgia Healthcare Group PLC
  2. 2018 was a significant year of investment and progress for Georgia Healthcare Group, as the Group has now completed its substantial three-year investment programme and business roll-out in all key areas of the healthcare system of Georgia
    In 2018, the Group delivered mid-teens revenue growth in both the healthcare services and the pharmacy and distribution businesses, and demonstrated significant progress in the medical insurance business by its recent turnaround and a good profit performance.

    We continued to make significant progress in our two new showcase hospitals and have completed our Mega Laboratory project, an important new business and revenue opportunity for the Group. We have also recently introduced dental services into the polyclinic network and started developing medical tourism, both supporting the development of new and more diverse revenue streams. Below I’ll highlight each of these in more detail.

    Group performance. The Group’s 2018 results reflect delivery on a number of these recent initiatives. EBITDA of GEL 132 million represented a 22% increase y-o-y, net profit increased by 16% over the same period and EBITDA to cash conversion grew from 54% to 75%. It has been pleasing to see robust results in each of the businesses. Following the recent launch of our two new flagship hospitals, results in the healthcare services business are now showing consistent and sustained improvements as we continue to increase the utilisation of our new state-of-the-art hospital facilities. The pharmacy and distribution business has exceeded expectations, with strong revenue growth, further expansion of its nationwide network, and an EBITDA margin in excess of 10% for the year, comfortably ahead of our initially targeted “more than 8%”. Our medical insurance business has continued its expansion and successful turnaround from being loss-making to being a contributor to the Group profit.

    Healthcare services. In 2018, healthcare services revenue grew 15% to GEL 306 million. EBITDA increased 9% y-o-y to GEL 76 million, and the EBITDA margin was 24.9% (the EBITDA margin for referral hospitals and community clinics, excluding the roll-out impact, stood at 28.7%). In the two new showcase facilities of our healthcare services business, Regional Hospital and Tbilisi Referral Hospital, we are seeing strong improvements in utilisation as the facilities are now both fully launched. Despite having only opened in March 2018, occupancy at our 306-bed Regional Hospital increased to 32.7% and the hospital started to generate a double-digit EBITDA margin in the fourth quarter of 2018 – a substantial achievement for a newly-launched hospital. The occupancy rate at Tbilisi Referral Hospital (fully opened in December 2017) was in excess of 46% in the fourth quarter.

    To support the further diversification of revenues and close medical service gaps in the country, we continue to grow our presence in the elective services market – which tends to be higher margin. In 2018, we continued launching new medical services in our referral hospitals, with 26 new services introduced during the year, including a home care service. This also includes opening the country’s strongest ophthalmology and cardiology departments by contracting the best team of doctors in their respective fields. Within six months of the new ophthalmology department launch, we had gained approximately 15% market share in these services, compared to the previously held share of less than 3%.

    We see medical tourism as a significant opportunity for growth over the next few years. Until recently, Georgia has been mainly a source of medical tourism outflow, but the significant recent investments in upgrading our hospital infrastructure and building our clinical and customer service quality have enabled the Group to make progress in recapturing the business of domestic patients that would historically have travelled abroad for treatment. We are now focused on developing medical tourism into Georgia. Our initial priority will be post-Soviet neighbouring countries and we have already started to raise awareness of our medical facilities throughout the region. We captured GEL 3.4 million of revenues from international visitors during 2018 and will continue to invest in an area that we are confident will become an important source of growth for the healthcare services business.

    Polyclinic network. Our polyclinic network has continued to expand (revenue up 33% y-o-y). These polyclinics now clearly stand out from their competition as new, modern facilities that provide a diverse range of high-quality services in one location. The number of registered patients in GHG’s Tbilisi polyclinics has now reached c.150,000, compared to c.93,000 at the end of 2017.

    In December 2018, we also entered into the Georgian dental services market by launching dental clinics within a number of our key polyclinics. Five polyclinics have already been equipped with modern dental equipment and cover a wide range of dental services. We plan to add several dental clinics in existing polyclinics in coming months and expect this to be another strong area of revenue growth over the next few years.

    Mega Laboratory. The construction of our Mega Lab, the largest laboratory in Georgia and the entire Caucasus region, was one of the key projects remaining in our investment programme. It was very pleasing to complete construction and open the lab in December 2018, and GHG now provides a full set of clinical and pathology tests, some of which are being introduced in the region for the first time.

    The project is supported by our colleagues from Jordan, Biolab, a subsidiary of IDH Group, who have many years of experience in this field. Biolab will support Mega Lab in obtaining the highest international healthcare accreditation over the next few years. In addition to providing significant synergies, this is an important new business that will be the clear leader in Georgia and the Caucasus region. Mega Lab plans to develop a retail network, with around 50 blood collection points across major regional cities in coming years, and to work on additional external contracts, contracting and serving healthcare facilities outside the Group, further diversifying the Group’s revenue streams.

    Pharmacy and distribution. Our pharmacy and distribution business posted record revenues of GEL 519 million, with over 15% y-o-y revenue growth supported by active marketing campaigns and sales initiatives implemented across our two combined pharmacy chains that has delivered 8.5% same-store growth during 2018.

    We have expanded the number of pharmacies to 270 in major cities, compared to 255 a year ago, and plan to further expand to over 300 pharmacies over the next couple of years. Our wholesale distribution business also delivered strong 2018 revenue growth of 18%.

    The pharmacy and distribution business EBITDA increased 34% y-o-y to GEL 52 million. The business full year EBITDA margin increased 150 basis points, reaching 10.1% in 2018, substantially above our targeted “more than 8%” margin. By seeking additional discounts from manufacturers and constantly working to improve our product mix at our pharmacies, including an increased range of private labelled medicines and para-pharmacy products, we expect to continue to deliver strong EBITDA going forward. The synergies we have been able to extract by combining our two pharma chains have enabled the business to provide Georgians affordable pricing on key products, while keeping our margin at an attractive level.

    The business achieved net profit totalling GEL 34 million for the year, growth of over 60%, reflecting the combination of strong revenue growth and improved margins, together with focused cost management.

    Medical insurance. Our medical insurance business had successful year in 2018, delivering all its strategic priorities and KPIs. The business turned around its earnings profile and at the same time continued to develop its role as an important feeder network in the origination and directing of patients towards our polyclinics and pharmacies in particular. The Group’s claims retention rates improved significantly, reaching c.40% in 2018. The combined ratio improved to 94.0% for 2018, compared to 102.5% last year. As a result, the business delivered positive EBITDA of GEL 4 million in 2018, and a net profit of GEL 3 million, compared to a similar net loss in 2017.

    The business has also started 2019 successfully. By winning recent tenders, the business retained one and added another of the country’s largest insurance clients for 2019. As a result, the total number of insured clients is now c.230,000. With the increased client base, GHG’s insurance business has become the largest private payer in the healthcare sector, further ensuring profitable growth and significant synergies across the Group.

    Investing in people development. We continue various training programmes for our employees to help them contribute to better business performance through personal and professional development. A key objective of the Group is to invest in the next generation of doctors and position ourselves as the employer of choice. In 2018 we spent a total of GEL 3 million on talent development. Our “GHG Leadership Programme” continuous to be one of the most popular leadership courses among our employees and currently over 50 middle level managers are engaged in the programme to improve their leadership and managerial skills. Over 200 talented people are currently involved in our medical residency programme, which improves the quality of postgraduate preparation and facilitates an increase in the number of qualified doctors in the country. Successful participants from the programme have already started employment as junior doctors within our healthcare facilities. We are pleased that this year we will also have the first 44 graduates from the programme.

    Consistently improving clinical standards. We remain focused on developing quality management measures and harmonising them across our integrated network through consistent protocols, procedures and our recently implemented clinical key performance indicator monitoring system. In 2018 our Clinical Team, headed by the Group’s Chief Clinical Officer, was actively engaged in developing and implementing these quality management measures, based on best practice principles, in our recently launched flagship hospitals, Regional Hospital and Tbilisi Referral Hospital. In 2018, several additional projects were initiated, addressing clinical quality issues including clinical pathway improvement projects related to sepsis, pneumonia and rational antibiotic therapy, standards of personnel safety and occupational safety.

    Capital framework and Dividend Policy. I’m pleased that we have completed our capital framework review and have recently announced the Group’s first dividend. In addition to providing greater access to affordable high-quality healthcare, the Group is pursuing attractive new growth opportunities. It is building markets in areas such as medical tourism, outpatient services, the provision of dental services, aesthetics, and laboratory diagnostics. When combined with the organic growth in our existing businesses, the higher utilisation of the recently-launched new hospitals and polyclinic network, and the expansion of our pharmacy and distribution business, we are targeting a double-digit compound annual growth rate in revenues over the next few years.

    The Board and the management also expect the Group to deliver an improved return on invested capital in each business and to generate substantially increased free cash flow. This reflects both higher earnings and reduced investment requirements over the next few years, following the completion of our significant three-year investment programme. Our capital allocation framework considers the likely capital required over the next few years to finance our growth and maintain our assets. Accordingly, management and the Board have decided the following:

    • To recommend to shareholders at the 2019 Annual General Meeting, a final dividend of GEL 0.053 per share, to be paid in respect of the 2018 financial year. This represents a payout of 20% of 2018 earnings.
    • To adopt a new dividend policy reflecting our intent that 20%-30% of annual profit attributable to shareholders will be distributed as dividends.
    • To target managing the Group balance sheet, on an ongoing basis, at an average less than 2.0 times net debt to EBITDA from the end of 2020.

    The Georgian macroeconomic environment. The Georgian economy continues to perform well with GDP growth in 2018 estimated at 4.7%. Strong external demand and double-digit growth of foreign exchange inflows reduced the current account deficit in 2018 and, in 3Q18 for the first time in the country’s history, Georgia had a current account surplus (0.3% of GDP). On the back of country’s strong economic growth, the Government’s healthcare budget continues to increase. According to its recently approved 2019 budget, total Government expenditure will increase by c.5%, with the health care (“UHC”) budget up c.7%. We expect further macroeconomic growth to continue these trends and support domestic economic growth, including the Georgian healthcare services market, over the next few years.

    Apart from market growth over the next few years, we expect to benefit from our recent investments, and that increased utilisation of our new and existing hospitals will translate into further growth and improved margins. The Group will continue to focus on its key priorities such as developing medical tourism and laboratory diagnostic services, expanding the outpatient network and dental clinics, adding new pharmacies, upgrading product mix and developing new opportunities. The Group’s strong balance sheet and increasing operating cash flows (an increase over 70% in 2018), together with improved earnings and lower investment capital expenditure requirements, will enable us to gradually reduce the business leverage and further improve our returns on invested capital.

    Nikoloz Gamkrelidze

    CEO of Georgia Healthcare Group PLC
  3. 2017 was a significant year of transition and progress for Georgia Healthcare Group, as the Group continued its recent substantial investment and business roll-out in all key areas of the healthcare system of Georgia.
    Developments in 2017 have involved the successful integration of our two recent pharma acquisitions and delivering key investment and growth priorities such as the Tbilisi Referral Hospital (previously called “Sunstone”) and Deka hospital redevelopment projects. Both hospitals have now been launched, resulting in the provision of over 600 high-quality new hospital beds to the Tbilisi hospital infrastructure. We have remained focused on improving quality for patients and, in response to Government changes to Georgia’s Universal Healthcare Programme (“UHC”) in May 2017, diversifying our stream of revenues, the latter particularly by growing the pharma and polyclinic businesses.

    The Group’s 2017 results clearly reflect delivery on these recent initiatives. EBITDA of GEL 108.1 million represented a 39% increase year-on-year, and profit before tax increased by 15% over the same period. Excluding the impact of the one-off items that increased 2016 net profit (see page 2, footnote 3), the Group’s net profit in 2017 increased by 16%.

    In the healthcare services business, our referral hospitals continued to deliver high single-digit organic revenue growth, while we continued to invest significantly in our two Tbilisi hospital redevelopment projects and other modernisation programmes. Following the partial opening of Tbilisi Referral Hospital in April 2017, we were pleased to see strong occupancy levels, growing to nearly 40% in December 2017. In December 2017 we completed the renovation, and the hospital is now fully operational as a 332-bed high-quality multi-profile hospital in East Tbilisi. We have also now completed building and renovation and have launched the 306-bed flagship Deka Hospital in Tbilisi, to create what we believe will be the hospital of choice in the country for high-quality elective medical care. As expected, our investment in these major redevelopment projects affected the healthcare services EBITDA margin, which fell to 26.4% in 2017. Excluding the dilutive impact of the newly launched hospitals, however, the EBITDA margin remained healthy at 29.2%.

    The structure of the UHC has continued to evolve. In May 2017, the Government introduced new eligibility criteria based on the income level of citizens and introduced deductible amounts for planned and certain urgent services, details of which are discussed later in this report. In addition, the Government revised the reimbursement mechanism for the provision of intensive care, which reduced reimbursement levels. We estimate that these changes to UHC reduced 2017 Group revenues by GEL 6-7 million. We do not expect any further material changes to UHC during 2018.

    As we continue to adapt to the impact of these changes, our healthcare services business has prioritised efforts to broaden its revenue sources and reduce its reliance on UHC. Government-funded healthcare programmes represented 67% of healthcare services revenues in 2017, compared to 73% in 2016, mainly as a result of increased revenue from planned services and from our growing polyclinic network. Both are largely paid for out-of-pocket by patients. The recent opening of Deka Hospital will drive this rebalancing further.

    To support the further diversification of revenue and close medical service gaps in the country, we continue to grow our presence in the planned, elective, services market – which tends to be higher margin. In 2017, we continued launching new medical services in our referral hospitals, with over 50 new services introduced, andin2018weplan to launch up to 50 more new services throughout the country. We have also recently initiated programme toattract high-quality physicians, who bring with them a portfolio of patients and the associated revenues. In July 2017, we acquired two community hospitals in the Khashuri and Kareli regions, which added an additional 90 beds to our portfolio. These acquisitions support our plans to expand our presence throughout Georgia, particularly in the country’s under-represented regions.

    As we come out of our recent intensive capital investment and integration programme, the Group’s focus in the hospital business will shift towards gaining efficiencies and improving free cash flow generation. Our management team is well positioned for the development of fee business by taking some hospital assets under management to create an additional stream of income and further potential synergies for the Group.

    Our IT team will help us to move to the next level of development by getting to a fully integrated health information system that will help us to manage more efficiently and deliver better care to our customers. In general, development of integrated digital platforms will be one of the Group’s top priorities in coming years. A clear demonstration of this was the recent introduction of e-prescriptions which have already become a mandatory tool for our doctors in Tbilisi, and which will drive more synergies across the Group.

    In 2017 we launched our programme to enlarge the footprint of our polyclinics and develop a nationwide chain to provide quality outpatient services to a much larger part of Georgia’s population. The Group now operates a total of 12 polyclinic clusters, which include 16 district polyclinics and 24 express outpatient clinics. In June 2017 we launched a campaign to increase the awareness of our polyclinic network and we have already increased both customer footfall and the number of registered patients. We now have 93,000 registered patients in Tbilisi and we expect this number to grow to around 200,000 by early 2019, driven by organic growth and further polyclinic acquisitions. Revenues from polyclinics increased by 35% during 2017, and the polyclinic EBITDA margin was 13.2% during the year, reflecting the impact of the ongoing rapid roll-out. We expect this margin to gradually improve s our portfolio matures.

    In the pharma business we completed the integration of the Pharmadepot and GPC chains of pharmacies, including the successful integration of the two businesses’ IT platforms. We now operate over 250 pharmacies in a countrywide distribution network (including 21 pharmacies located in our hospitals and clinics), and we expect this network of pharmacies to grow to more than 300 over the next two years. The pharma business now has a 30% revenue market share and is the clear market leader in Georgia. We are pursuing several strategies to further develop our pharma network’s performance, including the introduction of private label personal care products which we launched in October by acquiring the international private label brand “Attirance”.

    Our focus during 2017 was to ensure the full integration of the two pharmacy chains with minimal business disruption. This was successfully achieved. The processes of eliminating unnecessary costs and realising procurement synergies continue and we remain firmly on track to deliver all expected cost savings and revenue enhancements. As a result, the pharma business achieved a full year EBITDA margin of 8.6%, better than our medium-term target of more than 8%. The seasonally strong fourth quarter delivered an EBITDA margin of 10.2%. Going forward, the strong performance of the combined pharma business will continue to be an important growth opportunity for the Group and allow us to further diversify our earnings profile.

    Our medical insurance business made significant progress on its turnaround programme and delivered positive EBITDA in the second half of 2017. We renegotiated the pricing of existing contracts and closed selected loss-making contracts to adapt to the impact of the recent changes to the UHC programme. The loss ratio remained broadly stable at 84.2% in 2017, and the expense ratio improved to 18.3%, from 20.6% last year. The combined ratio improved during 2017 to 102.5%, from 104.7%. Over the next few years, we will seek to further improve the combined ratio to approximately 97%. These positive trends are further supported by the recent addition of a major new insurance client – the Georgian Ministry of Internal Affairs. This contract increases our number of people insured by c.65,000 to c.155,000 and will allow us to benefit from scale and achieve further synergies within the Group.

    Our medical insurance business continues to play an important role in our strategy to diversify our revenue streams. It increasingly directs patients with private medical insurance to our healthcare facilities, where they receive high-quality medical care and advice. During 2017, 37% of our medical insurance claims on outpatient services were retained within the Group.

    Another key priority for the Board, people and talent development, continues to be high on our agenda. The quality of our senior management team continues to improve, and we have also increased the pool of high-calibre executives throughout the Group over the last twelve months. Our top management team has gone through various leadership and personal development programmes. GHG’s leadership programme for middle level managers, a collaboration with one of the leading Georgian universities, is also becoming extremely popular among our employees. In 2017, two teams have completed the programme and, due to the high demand, the programme will continue in 2018. Development programmes will remain our priority in the coming years as we help our employees contribute to better business performance through personal and professional development, achieving more integrity and productivity within people.

    On the clinical side, we continue to focus on improving the knowledge and expertise of our doctors and nurses through education and practical development. We are also enhancing our clinical quality monitoring programme and have implemented high-quality clinical key performance indicator monitoring in all of our referral and medium-size hospitals. Our residency programme, a very important part of our strategy to develop a new generation of doctors, remains the most popular residency programme in the country with 112 residents currently in our training system. We expect up to an additional 100 residents to be enrolled in our residency programme during 2018.

    The Georgian macroeconomic environment has remained supportive, and we expect good levels of growth in the overall Georgian healthcare services market. In what remains a fast-changing healthcare environment, Georgia Healthcare Group remains the clear market leader, and we continue to build our business in all areas. 2017 was a year of significant investment, transition to the new UHC model, and strong progress in all of our key strategic priorities. The successful integration of the Group’s recent pharma acquisitions has created a combined business with a 30% revenue market share and significant opportunities to further improve cross-selling, particularly to polyclinics, to develop customer loyalty and maintain our healthy margins. Underlying margins in our healthcare services business are much stronger than those reported, and with the impact of the newly launched hospitals and further roll-out of the polyclinic network, we remain firmly on track to deliver strong and profitable growth, with more diverse revenue streams, over the next few years.

    Nikoloz Gamkrelidze

    CEO of Georgia Healthcare Group PLC
  4. 2016 was another extremely strong year for Georgia Healthcare Group
    2016 was another extremely strong year for Georgia Healthcare Group, as the Group continued to build strongly in all areas of the wider Georgian healthcare ecosystem including, for the first time, in the pharmaceutical retail and wholesale sector. We are delighted with our progress towards creating the highest quality hospital and primary healthcare system in the country while delivering the best outcomes, with high patient satisfaction and the best facilities, supporting significant improvement in the quality of care in Georgia.

    During the year, the Group continued to grow its operations, both organically and via acquisitions. We have made significant progress in the implementation of our strategy to develop a nationwide chain of outpatient clinics, subsequently growing our capacity to provide quality outpatient services to a much larger part of Georgia’s population. We increased the number of district outpatient clinics from seven to 13 during 2016, as well as now having 28 express clinics in operation. In May 2016, we completed the acquisition of GPC, one of the largest retail and wholesale pharmacy chains in Georgia. GPC operates a countrywide network of 118 pharmacies in major cities. The acquisition created a number of substantial purchase synergy opportunities, as well as significant potential for increased customer acquisition in our outpatient business. In addition, in January 2017, we completed the acquisition of the Pharmadepot chain of pharmacies – the fourth largest pharma retailer in Georgia (operating with 125 pharmacies) – which has made GHG the market leader in the pharma segment with c.29% market share by revenue. I am delighted that the integration of these two large retailers is going smoothly and is fully on track.

    The 2016 results clearly reflect these significant developments, and I am pleased to report a net profit of GEL 61.3 million, a 159.7% increase year-on-year from GEL 23.6 million in 2015. These results were, however, affected by the impact of a number of one-off items and business changes, net effect of which increased profit by GEL 21.7 million, the largest of which was the deferred tax release due to a corporate tax legislation change. On an operational basis, the Group made extremely good progress during the year with net revenues up 74.8% to GEL 423.8 million; EBITDA up 39.0% to GEL 78.0 million; and profit before income tax expense up 70.2% to GEL 40.2 million. Within this strong year-on-year performance, the Group continued to build strongly on a sequential basis, with record high revenue in both the healthcare services business and the pharma business. Profit before income tax expense in the 4Q of 2016 was GEL 13.0 million, up 156.9% on the 4Q of 2015, and up 25.6% on the 3Q of the year, giving the Group a strong earnings tailwind going into 2017.

    The Group’s overall performance continues to be driven by the healthcare services business which delivered net revenues of GEL 243.5 million, supported by 16.3% organic revenue growth and a 280 basis point EBITDA margin improvement to 30.2%.

    In our healthcare services business, the Group’s key strategic priorities are: to achieve one-third market share by hospital beds; to deliver a rapid launch of outpatient clinics in the highly fragmented and underpenetrated outpatient market; and to invest to close existing medical service gaps in Georgia. During 2016, we continued to make significant progress in each of these areas. The renovation work on both our Deka and Sunstone hospital facilities in Tbilisi has continued. In August, we opened one of the largest diagnostic centres in Georgia as part of the Deka hospital - the first step in developing Deka into a flagship multi-profile hospital for the country which we will also leverage to retain those patients currently going abroad for healthcare diagnostics and treatment. The renovation at Sunstone has been completed ahead of time and we are pleased to have recently received the first patients into this new multi-profile hospital. The opening of Sunstone enables the population of the eastern part of Tbilisi and the whole of the Kakheti region to get access to significantly improved healthcare services closer to their homes.

    Another key milestone for our development is more focus on planned and elective services. GHG hospitals have the best reputation in the country in treating emergency and complex cases which we can further build on in terms of planned and elective services. We have already implemented a strategy for that and will be developing further in some areas and services which we believe will increase our diversification and efficiency. We are currently in the process of launching more than 60 new services in more than ten of our referral hospitals. These services are primarily targeted at filling service gaps that currently exist in Georgia either due to the unavailability of the service or its poor quality. Our new service launches include a number of sophisticated services such as oncology, transplantation of bone marrow and paediatric kidney transplants, as well as services such as paediatrics, neonatology and ophthalmology. Our main focus in 2017 will be to increase our presence in the Tbilisi market, where we see substantial room to grow, especially in elective services.

    Our strategy to increase our share of healthcare revenues through the roll-out of a nationwide network of outpatient clinics has continued and we grew the number of our district clinics from seven in December 2015, to 13 in December 2016, with revenues from this part of the business increasing more than 120% year-on-year.

    During 2016, we made significant progress in monitoring and improving a number of clinical quality indicators within our referral hospitals and more improvements are planned in 2017. In this direction, we are involved in number of initiatives such as training professionals in clinical quality areas and in the internal process of development and implementation of clinical quality activity programmes and standards. In 2016 six such programmes were developed and already implemented in ten of our hospitals. During the year, we worked closely with the Centres for Disease Control and Prevention (“CDC”), the United States local representative office in south Caucasus. With our and CDC’s joint efforts we implemented an infection control and prevention programme at three of our healthcare facilities. Our local team, which worked with CDC on this project, continues to implement the programme at our other hospitals as well.

    2016 was a particularly busy year for us in terms of expanding into the pharma business and becoming the largest company in this market. In May we completed the acquisition of GPC, one of the largest retail and wholesale pharmacy chains in Georgia, and have made substantial progress with our integration activities. With important synergies from the GPC acquisition already having been captured, we are comfortably on track to deliver our initial guidance on synergies, and more than tripled the EBITDA margin in 4Q to 6.0%, from 1.8% in 2Q 2016.

    We believe, however, that the biggest value enhancement from the GPC acquisition is the potential for increased customer acquisition for our outpatient business through GPC’s one million customer interactions per month and 0.5 million loyalty programme users and we have already started to explore this opportunity. In August, we launched a bundled product for our pharma and outpatient businesses to access around 500,000 GPC customers who have never been to our outpatient facilities, and we expect to direct over 10,000 new customers per month from our pharmacies to our clinics.

    In addition, in November 2016 we announced the acquisition of ABC, the fourth largest player in the Georgian pharma market and owner of the Pharmadepot chain of pharmacies. We completed the transaction in January 2017, and as a result GHG has become the market leader in the pharma market (with c.29% market share by revenue) in Georgia. The Pharmadepot acquisition has a strong strategic fit with our existing business model. We aim to keep both brands, as they have a distinct positioning in two customer segments: GPC for higher-end customers and Pharmadepot for the mass retail. Together with the strong Pharmadepot retail franchise, we also brought their strong management team to the Group, and they are now leading our integrated pharma business. This new team brings an excellent track record of growth and execution that managed to grow a niche wholesale company into one of the largest pharma retailers in 4-5 years. The integration process is ongoing and I’m pleased to announce that it is going smoothly and is expected to be finalised in the second half of 2017 as anticipated. We are confident that we will achieve the key efficiency metrics that we have targeted for the combined pharma business and, as a result, create substantial value for our shareholders.

    Apart from significant cost synergies in areas of procurement and administrative expenses, we aim to focus on three main areas in the combined pharma business over the next two to three years: decreasing the cost of goods sold/cost of services by realising captive cost synergies and manufacturer cost synergies; enhancing the retail margin by launching generic, contract manufactured and private label products; and expanding sales to hospitals and other small players in pharma. We will be further expanding our footprint selectively both in large cities as well as in many regions of Georgia, and will realise additional revenue synergies in healthcare services from the traffic from our combined pharma business that we expect to average two million customer interactions per month.

    Our medical insurance business had a more challenging year, particularly reflecting the loss-making impact of one large corporate insurance contract. This contract has now expired and has not been renewed. As a result, we expect to see a stabilisation of earnings in 2017, compared to a loss of GEL 4.9 million in 2016.

    One of our main priorities: people development, continued to be high on our agenda throughout 2016. The depth of our senior management team continued to improve with the recruitment of several high performing key executives. In addition, 25 executives from our mid-level management team completed a tailored six month course for them to improve their leadership and managerial skills. On the clinical side, we continued to focus on the education and training of our doctors and nurses. Our residency programme, which is a very important part of our strategy to develop a new generation of doctors, became the most popular residency programme in the country among resident doctors and, with 58 residents currently in our system, we anticipate accepting a further c.100 in 2017. Our nursing training college is also now fully functional, and we will be further increasing its scale during 2017. People development, one of our key success factors, will remain a top priority in 2017 as well.

    Focus on IT development, will be another key objective for us in 2017 and beyond and the recent management reshuffle and strengthening in this field was done to further support this goal. In 2016 we successfully rolled out an integrated Enterprise Resource Planning (“ERP”) system and a core billing and registration module in our healthcare business. We are going to increase this IT focus over the next few years, as we believe that our superior IT competencies will be key for our success as we look for GHG to move to the next level of development in the provision of integrated services across the whole patient pathway.

    We remain comfortably on track to deliver a more than doubling of 2015 healthcare services revenues by 2018. Healthcare services net revenue increased by 27.2% year-on-year in 2016, with organic revenue growth of more than 16%. In addition, the rapid roll-out of our nationwide outpatient clinic model, and our significant new participation in the Georgian pharmaceuticals market will continue to create further business development and cost efficiency opportunities over the next few years. At the same time, we continue to expect the overall Georgian healthcare services market revenues to grow at a double-digit rate per annum over the next few years, development of which, alongside with UHC programme, remains as one of the top priorities for the Georgian Government.

    The Group delivered a strong performance in 2016, and remains in good shape to benefit over the next few years from the combination of its position as the largest healthcare services provider, pharmaceuticals wholesaler and retailer and medical insurer in what continues to be a fast-growing, predominantly privately-owned, Georgian healthcare market. As a result, the Group is well positioned to deliver further strong growth in 2017 and beyond.

    Nikoloz Gamkrelidze

    Chief Executive Officer
  5. 2015 capped an extraordinary two-year growth period for Georgia Healthcare Group.

    During the course of 2014 and 2015, the Group grew its operations substantially further becoming clear market leader among healthcare services and medical insurance providers in Georgia.

    At the end of 2015, we had 35 hospitals with 2,670 hospital beds representing a substantially increased market share of 26.6% of Georgia’s total hospital beds. In addition, in 2015 we began to implement our ambulatory clinic strategy to develop a nationwide chain of ambulatory clinics, and have already opened four clusters of ambulatory clinics by the end of 2015.

    In November 2015, following our listing on the Premium Segment of the London Stock Exchange, we also became the first Georgian company outside of the financial sector with shares trading on an international stock market. As part of this process, we raised c.US$100 million for further investment in the development of the business over the next two-three years. Recently we also become a member of the FTSE All Share Index.

    The 2015 results clearly reflect these significant developments and I am pleased to report a net profit of GEL 23.6 million, a 78.1% increase year-on-year. This profit was achieved despite the impact of a currency exchange adjustment relating to the proceeds received from the capital raise and before the positive impact of utilising some of the proceeds to reduce the Group’s existing indebtedness. Adjusting for these two issues, our run-rate net profit for the fourth quarter of 2015 was GEL 9.5 million, or GEL 28.0 million for the full year. We expect significant improvement in our earnings from the first quarter of 2016 onwards, due to reduced expenditure on interest – we repaid GEL 104.4 million borrowings at the end of 2015/ beginning of 2016, from IPO proceeds. This reduced total borrowings to GEL 105.6 million as at 31 January 2016. As a result, our net debt to EBITDA was zero at the end of 2015, since cash and bank deposits exceeded borrowings.

    Revenue, at GEL 242.7 million for the year, increased by 22.5% y-o-y, supported in particular by strong 17.3% organic growth in the Healthcare Services business, where revenue increased by 32.5% to GEL 195.0 million. Margins in the Healthcare Services business also improved significantly with an EBITDA margin for the year of 27.4%, compared to 24.3% in 2014. This improvement reflects the increasing utilisation and scale of our business as well as the capturing of ongoing efficiency savings and procurement benefits from the integration of recently acquired hospitals. In the fourth quarter of 2015, this margin increased further to 29.8%, towards our target of c.30% EBITDA margin. We benefit significantly from our economies of scale and this was reflected in 14.8 percentage points of positive operating leverage during the year. We expect to deliver strong levels of organic growth in 2016, as we have done in previous years, with margins enhanced year-on-year together with positive operating leverage, which is one of the metrics we follow closely.

    The increased focus on the Universal Healthcare Programme in Georgia has seen a substantial shift in revenue towards the healthcare services market, leading to a significant industry-wide reduction in medical insurance revenue from the previous State Insurance Programme (SIP). As a result, our medical insurance business experienced a 20.8% reduction in revenue during the year. Against this backdrop, it delivered an extremely resilient performance by refocusing on the private medical insurance market, where we grew our revenues by 32.0% as a result of introducing a differentiated product suite and improved pricing. Costs remained well managed and the combined ratio improved by 2.8 percentage points during the year to 96.7%. EBITDA from the insurance business more than doubled to GEL 2.6 million. Net profit increased by 76.4% to GEL 1.8 million. Price increases to a number of insurance products (in response to the impact of the Lari devaluation in 2015) leaves the business in good shape for 2016. Apart from focusing on capturing further benefits of scale, the main Key Performance Indicator (KPI) for our insurance business in 2016 will be capturing more synergies with our high margin outpatient business and retaining at least twice as much claims within our own outpatient network.

    We made significant progress in each of our strategic priorities during the year. At our healthcare services business, we continued to expand significantly in the higher revenue hospital segments in Tbilisi with the acquisition, in August 2015, of the High Technology Medical Centre University Clinic (HTMC). This acquisition of the single largest hospital and former competitor in the country increased our market share by hospital beds to 26.6%, as well as enabling us to be represented in the higher margin diagnostics and oncology segments in Tbilisi. Furthermore, we have already started renovation work on both our, Deka and Sunstone hospital facilities. These two newly modernised multi-profile hospitals are expected to be fully completed and operational in 2017. Our strategy to increase our share of healthcare revenues through the roll-out of a national network of ambulatory clinics has begun. By the end of January 2016 we had opened four ambulatory clusters in a number densely populated areas of Tbilisi and one in Kutaisi, the second largest city in Georgia. We plan to open at least six further ambulatory clusters in Tbilisi and other major cities in Georgia during 2016. This is an extremely significant growth opportunity for the Group over the next few years; we plan to build significant market share in what is a highly fragmented and high-margin segment of a market in which we currently have only approximately 1% share of the market.

    We have recently moved into the pharma business by agreeing to acquire a 100% equity stake in JSC GPC (“GPC”) (the acquisition remains subject to relevant regulatory approvals). GPC is the third largest pharmaceutical retailer and wholesaler in Georgia, and its acquisition clearly fits our strategy to be the leading integrated player in the Georgian healthcare eco-system. It positions us as a major purchaser of pharmaceutical products in Georgia and offers very important synergies to capture through decreased cost of goods sold in our services business. Moreover, GPC’s strong customer loyalty franchise, with one million monthly customer interactions and 0.5 million members of its loyalty programs, is expected to feed referrals to GHG’s ambulatory clinics, further enhancing our existing “patient capture” model. In this letter I would also like to welcome GPC’s management team and more than 1,600 employees to our Group.

    The breadth and depth of the expertise and persistent efforts of our senior and middle management team have been instrumental in delivering our growth strategy and we remain firmly on track to more than double 2015 healthcare services revenues by 2018. Healthcare services revenue increased by 32.5% year-on-year in 2015 with organic revenue growth of more than 17%, which was supplemented by the impact of acquisitions completed over the last few years. In addition to the significant business opportunities available over the next few years, we continue to expect the overall Georgian healthcare services market revenue to grow at a compound rate that exceeds 13% per annum during the 2014-18 period.

    There are still many service gaps in Georgia which, as the largest provider of healthcare services in the country, GHG is focused on covering. In 2015 we successfully introduced new services to the country including liver transplant surgery, children’s cardiosurgery, oncologic radiotherapy in western Georgia and many other services. There is still a significant pipeline of similar services to explore and our team is constantly working to close these service gaps so as to enable us to fulfill our mission to provide Georgian citizens with access to high-quality healthcare services without leaving the country.

    Recruiting and retaining highly skilled personnel, both on senior as well as middle level, is one of our top priorities, considering the growth dynamics and current gaps in certain fields in Georgia. Therefore we will be further working on development and expansion of our management bench in 2016 to support our growth plans. We particularly focus on the training and education of our staff, as well as sourcing a new generation of medical personnel. We remain the only healthcare institution in Georgia to have in-house training of our own personnel. Since the beginning of 2014, we have invested over GEL 3.0 million in training and have a dedicated staff of 45 trainers, largely focusing on the areas of nursing and critical care. Developing a new generation of nurses and doctors is high on our agenda; to address this we facilitated the opening of a nursing college at the leading medical university in Georgia and have launched residency programmes in over ten fields. Both of these initiatives are fully operational now and we expect the young generation of doctors and nurses to further improve the quality of care for our patients.

    In the medical insurance business, we plan to leverage opportunities from the reform of the Georgian healthcare sector to increase our private medical insurance customer base. During 2015, we increased our market share from 36.0% to 38.4%, whilst growing our revenues from private medical insurance products by 32%. There are significant synergies between our healthcare services and medical insurance businesses and the insurance business is playing a significant role in our ambulatory business expansion strategy. During 2015, for example, only GEL 3.5 million or 33.7% of total ambulatory claims was paid to ambulatory clinics within the Group. We expect that this number should double at least in 2016.

    From a macroeconomic perspective, Georgia’s performance has been remarkably resilient against the challenging backdrop in which many of Georgia’s regional trading partners have suffered economically as a result of falling oil prices. During 2015, Georgia delivered real GDP growth of 2.8%, whilst inflation was maintained below the 5% target range. Foreign Direct Investment continued to be strong; tourist numbers – a significant driver of US$ inflows for the country – continue to rise and, as a result, the Georgian Government’s fiscal position continues to be strong. The Universal Healthcare Programme remains a significant priority for the Government and Government expenditure on healthcare will increase by 81.4% from GEL 487.9 million in 2013 to GEL 885.0 million in 2016 according to the approved government budget. This ongoing increase in expected Government healthcare spending underpins the substantial organic growth opportunities for the Group. The Government’s budgeted spend on healthcare, however still remains low compared to many other countries at just over 2% of GDP and approximately 7% of annual tax revenues.

    As a result Georgia Healthcare Group is in extremely good shape to benefit over the next few years from the combination of its position as the largest healthcare services and medical insurance provider in the fast-growing, predominantly privately owned Georgian healthcare services market. We have grown rapidly in recent years, driven by the significant organic expansion of existing facilities, and by selectively acquiring and integrating a number of complementary businesses and assets. We expect the Government to continue to prioritise healthcare services and this, combined with both organic and further acquisition opportunities, leaves the Group well positioned to deliver strong growth in 2016 and beyond.

    Nikoloz Gamkrelidze

    CEO of Georgia Healthcare Group PLC